Audit Sees Room for Improvement in Denver's Short-Term Rental Program

Audit Sees Room for Improvement in Denver's Short-Term Rental Program
Denver Excise and Licenses
Denver's short-term rental rules took effect January 1, 2017, and despite a 71 percent compliance rate, a recent city audit of the program says it could use some work.

"They've done a pretty good job of implementing this new program. They have a ways to go to get to more complete implementation," says Denver Auditor Tim O'Brien. "Ideally, what you want to have is somebody who has short-term rental properties, that they're properly licensed and that they're paying the taxes they're supposed to pay."

About one-third of STRs are still operating in the shadows, the audit found, and no one has documented the impact that the ordinance has had on neighborhoods.

The audit was designed to see whether the Department of Excise and Licenses, which works with the Department of Finance-Treasury Division to collect STR taxes, has been effectively enforcing the rules for STRs that Denver City Council approved in 2016, as well as sufficiently collecting taxes. In addition, the audit investigated whether those measures have supported the effort to create safe and responsible STR operations.

After getting a flurry of phone calls in 2014 from agitated residents complaining about STRs in their neighborhood, councilwoman Mary Beth Susman led the charge to regulate STRs as a means of containing the city's sharing economy. STRs were then wholly illegal in Denver, but thousands of residents were renting out rooms in their homes, secondary houses and alternative dwelling units on popular websites such as Airbnb and VRBO. (Our report on Susman's efforts regarding STRs, "The Inn Crowd," was published exactly two years ago, on December 22, 2015.)

Following a two-year process, Denver City Council approved an ordinance regulating STRs in June 2016; those rules went into effect at the start of 2017. Now STR hosts are required to apply for a business license, post a registration number on their online profile for enforcement purposes, and pay taxes. Also, STRs are limited to operating only out of primary households, a provision that put some 400 hosts who were renting secondary houses out of business or drove them to operating illegally.

O'Brien points out that some of those key enforcement pieces are missing the mark: There are still unlicensed STRs, others aren't paying taxes in one way or another, and some properties have multiple licenses attached to them when they should only have one.  "Some of that stuff needs to be cleaned up, but overall things are headed in the right direction," he adds.

click to enlarge Denver Auditor Tim O'Brien just looked at STRs. - TIM O'BRIEN FACEBOOK
Denver Auditor Tim O'Brien just looked at STRs.
Tim O'Brien Facebook
According to the report summarizing the audit, which started in April, between January 1 and August 31 of this year, Excise and Licenses collected $49,000 for about 2,000 STR licenses that it issued. However, 2,923 STRs are active in this city — which means 32 percent are still operating illegally.

During this same period, 1,614 notices of violation were issued. Whether they were for non-compliance or lack of a license, 21 percent were unaddressed. The department hasn't acted on 196 at all, and 22 of 34 administrative citations have yet to be addressed, costing the department about $4,550 in outstanding fines.

Hosts are required to collect and remit to the city a 10.75 percent lodger's tax, occupational privilege tax, business personal property tax, and a 4 percent local sales tax. The audit found that between January and August, the treasury department collected $978,362 in lodger's taxes, $3,925 in sales taxes, nearly $40,000 in business taxes related to STRs — and nothing in employee or business personal property taxes.

The audit also found that while Excise and Licenses has data about the effectiveness of STR rules and enforcement procedures, it is not being analyzed. The 2016 ordinance suggested that some sort of analysis be done to see if and how the STR rules were affecting neighborhoods, and whether they had an impact on affordable housing.

Are the rules making neighborhoods safer?  "I think that's an open item because part of the code talked about determining the impact of neighborhoods and affordable housing," O'Brien replies. "While they have data on impact on neighborhoods, nobody is analyzing the data to come back with a report that says, 'Police calls are up or police calls are down.' That kind of analysis needs to take place."

click to enlarge Ashley Kilroy, director of Excises and Licenses. - EXCISE AND LICENSES
Ashley Kilroy, director of Excises and Licenses.
Excise and Licenses
STRs are a relatively new phenomenon and have seen explosive growth in recent years; cities across the country have been trying to figure out how to deal with them. "Because it advertises all online, we as a government don't know if there's a short-term rental operating down the block from you because there's no sign out there," says Ashley Kilroy, director of Excise and Licenses. She says Denver's regulatory STR strategy is among the more innovative in the country and that other cities are looking at Denver's model.

Among Denver's innovations is requiring STR hosts to have a registration number on the profile of whatever online platform they are using. That way Excise and Licenses doesn't have to rely on inspectors wandering Denver neighborhoods, looking for houses that appear to be a short-term rental, or wait for neighbor complaints. Instead, it uses a third party to scour the internet for local listings that don't have that registration number. Once one is located, Excise and Licenses contacts the property owner. Another option would have been hiring additional inspectors.

"We have a 20th-century solution for a 21st-century problem," says Kilroy, quoting a former department staff member. Kilroy was promoted from the marijuana enforcement division to director of the department in November 2016, after the STR ordinance passed council.

Denver Excise and Licenses
The STR license is the first and only city license that can be acquired online, another step designed to get more hosts licensed. As part of the department's initial strategy for implementing the ordinance, it held a variety of educational events for hosts and produced informational material about the upcoming changes in laws.

If an STR is advertising online without a registration number, Excise and Licenses will give it a warning. If the host doesn't apply online for a license within fourteen days, it may face an administrative citation of $150. After another fourteen days of no response, the department posts a notice on the property and the fine escalates every day it operates without a license.

"That's so much more efficient than having inspectors have to drive by someone's house every day and knock on the door and see if there's a party going on or there's a bunch of people from out of town," continues Kilroy.

So far, three STRs have had to give up their license and agree to not operate for a year. Three more cases are pending and five are under investigation.

 "We have the highest compliant rate in the county," Kilroy says, citing Denver's 71 percent compliance rate. New Orleans comes in next with 53 percent compliance and Portland is at 45 percent, according to the department's analysis.

Kilroy says Excise and Licenses is reaching the metrics and goals that it had set. "We feel like we're doing a good job," she explains. "We are early into the process. We launched in January and the auditor started auditing us in April. So definitely I think there's some good takeaways we will be implementing from the audit, and we're completely open to having a second set of eyes on and continuing to improve."

O'Brien started the audit early for a reason, he explains: "What we saw was we'd rather get started with this because it is a new program, and if there were any course corrections that need to be made, those can be identified rather than wait three years and find out that they're missing a big segment of the market. So we thought the timing was probably pretty good."

Excise and Licenses did not agree with all of the audit's recommendations, as noted in the report. It did not agree to reviewing all rules and regulations, since they are so new and still need time to play out. As for analyzing how the rules impact neighborhoods and affordable housing, Excise and Licenses told the audit committee that "affordable housing analysis is beyond EXL's expertise and analytical capabilities. While we agree that this type of analysis may be interesting, it would be inappropriate and irresponsible for EXL, a business licensing organization, to conduct such an analysis based solely on the short-term rental data collected secondary to licensee compliance."

In response, O'Brien is suggesting that Excise and Licenses work with Denver City Council to see who could analyze that data. The audit committee will revisit other issues with Excise and Licenses next year.

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